Honeymoon rate mortgages, also known as Introductory rate mortgages are self descriptive. The mortgage lender provides an introductory/discounted rate on the lender’s Standard Variable Rate (SVR) mortgage to entice your business over to them. For example, a mortgage lender may offer a 1.5% discount on its SVR mortgage for two years. With an SVR of 8%, this would make your mortgage rate 6.5%.
Honeymoon rates are of course variable as they are linked to the SVR, which is in turn linked to the Reserve Bank base rate. This means should the base rate fall, the SVR mortgage will quickly follow suit, decreasing your monthly mortgage payments. However, should interest rates rise, so will your monthly payments. Lenders are also pretty quick at implementing an SVR rise, but can sometimes leave it weeks before applying a cut.
This type of mortgage is therefore not for those on a tight budget as your mortgage payments can vary. However, since relatively few lenders offer fixed or capped rate mortgages, in many cases honeymoon rates are the only real alternative to sitting on the SVR at a higher rate.
For most, the worst thing you can do is sit on the Standard Variable Rate. Just simply asking for a lower rate can reduce your payments significantly
If you are looking at a new mortgage or are no longer on a honeymoon/fixed rate with your current lender, one of the worst things you can do is opt for/sit on the Standard Variable Rate. This is because mortgage lenders want to entice your business away from the competition. By committing to a lender for 3-5 years, mortgage lenders reward you by offering a lower rate and shopping around makes sure you get the lowest rate in the market. What’s more, is that most home lenders offer portable mortgages, so if you move home, you can take your mortgage with you. A tie in doesn’t mean you can’t move. This is free money, shop around and see what you can save.
Mortgage Redemption Penalties
Again, like fixed rate mortgages, introductory rate mortgages tend to have redemption penalties should you try and switch mortgage or pay it off within the tie in/early redemption period, you’ll be hit with charge.